India Stock Market: Equity Risk Premium
In case some of you are wondering about my 20% discount rate in the post: India Stocks: Bank Nifty offering good value
I have used the work of Varma/Barua June 2006 where good work was done in re-creating data series to allow a robust calculation of an equity risk premium for India. They came up with 12.5% ERP and I have used a 7.5% risk free rate going forward, so we have a 20% discount rate.
The overall indices can also be ball-parked using this method. If we assume:
- 10% reduction in EPS for the indices in 2009-2010
- 15% earnings growth rate for next 10 years and 10% thereafter
- Discount rate of 20%
Then we get the following fair values for the Indices:
Nifty 2460 Sensex 8600
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